Well, here’s one reason the talks may have broken down: According to China Mobile, there were already 400,000 cracked iPhones using its cellular network by the end of 2007.

That number, if accurate, is astonishing. It would mean that there are more unauthorized iPhones in China than there are authorized iPhones in Europe. It would account for the largest part of the so-called “missing” iPhones. And it would suggest that China Mobile may be far less willing than the European carriers to give Steve Jobs the hefty revenue sharing cut he demands in return for the right to be that country’s exclusive iPhone carrier. Why should China Mobile pay for what it’s already getting for free?

Of course, it’s also possible that the number is bogus, a trick card being played by China Mobile in the high-stakes poker game it is playing with Cupertino. The figure first appeared, as near as we can tell, in a report written by Anty Zheng, content manager for an online newsletter called In-Stat China. For the full text, see here.

Zheng goes on to argue that an Apple-China Mobile deal would be good for both parties:

We have never doubted that the iPhone will achieve greater success than iPod in China if Apple teams with China Mobile to launch its Chinese version. There are two reasons. Firstly, different from the US where the smartphone market is fairly limited, appealing primarily to business users, The smartphone market in China, though, is an entertainment-oriented individual consumer market. The main reasons that Chinese mobile users purchase smartphones include entertainment (such as music players, cameras and video) and to access mobile Internet applications (such as IM, e-book, and games). We believe the iPhone will be favored by these consumers as it can better meet such demand. Secondly, high-end handset buyers significantly outnumber high-end mp3 player buyers. We estimate that 20% of handsets sold in China in 2007 cost more than 4,000 RMB (US$533). In another words, there are an estimated 28 million potential users for the iPhone in China. (link)